Boston Fed VP: Blockchain Will Wake Up Swift and Other Middlemen

Since the rise of blockchain technology, the fate of the financial messaging platform has been at the center of discussions between startups and incumbents. However, the subject was addressed recently by a perhaps unlikely source: Jim Cunha, senior vice president of the Federal Reserve Bank of Boston, who perhaps begrudgingly answered the question asked to him at a recent event.

A high-ranking official at one of the 12 institutions that comprise the U.S. central bank system, Cunha drew laughs at a fintech conference hosted by the Federal Reserve Bank of Philadelphia last week when he jokingly tried to defer the question to another panelist.

But despite the acknowledgment of how contentious that question can be, eventually, he answered, and in doing so, showcased an acceptance of the changing role middlemen of all kinds will have to adopt to stay relevant as industries begin migrating to blockchains and other financial technology.

Cunha told the audience:

“Any incumbent, that’s a middleman – which the Fed is, stock exchanges are, Swift is, The Clearing House is – I wouldn’t say that the fintechs are going to put us out of business, necessarily. What they will do is wake us up in some cases to be a little more innovative with our systems in a way that’s positive.”

Ongoing work

Coming at the tail end of a speech Cunha gave on “Bitcoin, Blockchain and other Cryptocurrencies,” Cunha followed the remarks with new details about the The Federal Reserve Bank of Boston’s work with blockchain and his personal thoughts on what those efforts might eventually mean.

Specifically, Cunha described work ongoing inside the Fed to educate monetary policymakers, payments experts and regulatory specialists on the “risk and potential” of blockchain technology.

Included in that work are at least two previously unrevealed proofs-of-concept being built using Hyperledger Fabric and ethereum. While Cunha didn’t reveal many details about the PoCs, he did stress they were experiments only.

“In my lifetime we won’t put the platforms we’re building now into production. We’re trying to learn,” he said.

And one of the things Cunha and his team have learned is that cryptocurrencies are very different from the underlying blockchains on which they operate.

While the distinction is certainly not new, Cunha’s interpretation of that division shows how much outlook on the technology has evolved. Initially, the Fed seemed to lump blockchain together with bitcoin and other cryptocurrencies, associating the bad reputation of the latter with the former as well.

Speaking on stage, Cunha argued for regulation that does not “squash the currency,” because the “innovation is too important.”

Even as Cunha elaborated on the potential benefits of cryptocurrencies, he the detailed one particular area of concern. He believes an increase in the number of regulated bitcoin exchanges has “driven a lot of bitcoin [users] to other currencies – monero and others that are built as harder to trace than bitcoin.”

Bridging the gap

And the only way that innovation will be fully realized, according to the bank official, is by increasing partnerships between financial systems new and old, both in terms of technology and people.

He pointed to efforts that have emerged directly from the banking world, including the Stella project, created in partnership between two central banks, and the Utility Settlement Coin project, run by a number of for-profit banks. He further mentioned projects such as Axoni’s work with the DTCC and Digital Asset Holdings’ work with the Australian Securities Exchange.

Specifically as it relates to Swift, though, Cunha noted the CLS consortium’s work on a project designed to work in harmony with the payments messaging system, and even the work done by Swift itself, using both as examples of how blockchain is pushing financial incumbents to become more cutting edge.

While there are nimble startups, said Cunha – pointing to Ripple (which has perhaps been the most aggressive in its pursuit of Swift’s market share) as an example of the kinds of business models that could ultimately prove more disruptive – he concluded that partnerships between the two camps are inevitable.

He concluded:

“The partnerships will be where the ultimate success is.”

Image courtesy of Federal Reserve Bank of Philadelphia

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